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Executive Summary

• AI Earnings and Sentiment:
  Residual angst from Oracle and Broadcom’s earnings underscored rising investor scrutiny within the AI complex, though sentiment improved late in the week following Micron’s strong earnings and a bullish analyst update on CoreWeave.
• Federal Reserve Policy:
  Economic results continue to support an accommodative Federal Reserve as we transition into a new year.
• Market Rotation and Technicals:
  A rotation away from crowded mega-cap technology and toward cyclicals, industrials, and smaller-cap stocks reflected supportive policy dynamics, while broader market trends remained constructively consolidative.
• Chart of the Week: Piper Sandler’s Chief Investment Strategist, Michael Kantrowitz, CFA, graciously allows Financial Sense to share a chart from his work on the rise in unemployment relative to historical scenarios.

The AI Trade Enters a Volatile Reset Phase

The dominant market narrative this week centered on a sharp reassessment of the AI trade, driven by earnings reactions, infrastructure concerns, and shifting sentiment toward capital intensity. Early in the week, technology stocks lagged badly, pulling the Nasdaq Composite lower as post-earnings weakness in Broadcom (AVGO) and Oracle (ORCL) extended concerns that expectations across AI hardware, software, and data center spending may have outrun near-term fundamentals. Mega-cap pressure from Apple (AAPL) and Microsoft (MSFT) compounded index-level weakness, even as NVIDIA managed relative resilience.

The selling intensified midweek following reports that Blue Owl Capital would no longer fund a $10 billion Oracle data center project in Michigan. That single headline reverberated across the market, raising questions about financing, timelines, and return profiles for hyperscale AI infrastructure. Power generation and transmission names sold off aggressively, with GE Vernova (GEV) and Constellation Energy (CEG) among the hardest hit, as investors reassessed the assumption of uninterrupted demand growth from AI-driven electricity needs. Semiconductor stocks also suffered, with AMD, NVIDIA (NVDA), and Micron (MU) dragging the PHLX Semiconductor Index sharply lower.

Importantly, this pullback was not limited to speculative corners of the market. The Vanguard Mega Cap Growth ETF (MGK) fell nearly 2 percent at its low point, underscoring how concentrated AI exposure has become within the largest index weights. As these stocks faltered, the S&P 500 briefly surrendered its 50-day moving average, amplifying technical pressure and reinforcing the idea that leadership fatigue was setting in.

The tone shifted meaningfully on Thursday after Micron delivered a decisive earnings beat and issued guidance that came in well above expectations. The results helped rebuild confidence in memory pricing, AI server demand, and the broader semiconductor cycle. Chipmakers rallied sharply, with storage peers such as Sandisk, Western Digital, and Seagate participating in the move. That renewed optimism carried into Friday as Micron extended its gains and Oracle rebounded strongly following headlines related to TikTok’s U.S. operations. Sentiment also improved after news that CoreWeave (CRWV), an AI-focused data center company that rents computing power to AI developers, was named as one of 24 companies selected to participate in the Department of Energy’s new Genesis Mission initiative aimed at advancing scientific discovery. The positive tone was further reinforced by Citi Research, where analyst Tyler Radke resumed coverage of CoreWeave with a $135 price target, nearly double its prior closing price, citing several potential catalysts that could materially improve the company’s earnings trajectory in 2026. Together, these developments reverberated across the industry, providing a broader lift to AI-related equities alongside the momentum generated by Micron’s earnings report.

Investment implication: The AI trade is transitioning from a momentum-driven phase to a fundamentals-driven one, favoring companies with proven earnings leverage, balance sheet strength, and pricing power rather than broad thematic exposure.

Economic Data Reinforces the Fed’s Easing Bias

Economic releases this week delivered a supportive backdrop for risk assets, reinforcing the Federal Reserve’s decision to ease policy while keeping growth concerns manageable. The most important development came from inflation data, which showed meaningful year-over-year improvement despite reporting complications tied to missing October figures. Headline CPI slowed to 2.7 percent from 3.0 percent, while core CPI eased to 2.6 percent from 3.0 percent. While the report lacked monthly clarity, the direction of travel was unambiguously favorable.

November nonfarm payrolls rose by 64,000, comfortably ahead of expectations but following a sharp downward print in October. The unemployment rate ticked up to 4.6 percent, while average hourly earnings growth slowed to just 0.1 percent. Taken together, the data supported the Fed’s view of a labor market that is cooling without breaking. Initial jobless claims declined, but continuing claims rose, reinforcing a low-firing, low-hiring dynamic that policymakers have flagged as a key risk.

Fed commentary throughout the week echoed this interpretation. New York Fed President John Williams expressed confidence that inflation would continue to fall and growth would stabilize, while Governor Miran reiterated concerns that delayed easing could exacerbate labor market weakness. Against that backdrop, market attention increasingly turned toward leadership at the Fed, as President Trump narrowed his shortlist for the next Fed Chair. While political uncertainty remains a wildcard, markets appeared more focused on the policy trajectory than personalities.

Other economic indicators painted a picture of uneven momentum. Manufacturing surveys from New York and Philadelphia surprised to the downside, signaling ongoing softness in goods-producing sectors. Services activity remained in expansion territory but showed signs of deceleration. Housing data reflected persistent affordability constraints, with single-family starts declining sharply, particularly in the South. Consumer sentiment weakened further, underscoring the psychological impact of inflation and labor uncertainty even as spending data showed resilience.

Retail sales underscored that divergence clearly. While headline sales were flat, sales excluding autos rose 0.4%. Discretionary categories such as department stores, furniture, and online retail posted solid gains, suggesting that higher-income consumers remain engaged even as lower-income households face increasing pressure. This two-tiered retail dynamic is likely to persist if unemployment continues to rise while asset valuations remain elevated.

Investment implication: Slowing inflation and a cooling labor market strengthen the case for lower rates, supporting duration-sensitive assets and quality equities while reinforcing the importance of selective exposure to economically resilient sectors.

Rotation, Volatility, and a Market Searching for Direction

Beyond AI and macro headlines, this week’s market action revealed an important underlying theme: leadership remains unsettled, and rotation is ongoing. Early in the week, defensive sectors such as health care, utilities, and consumer staples attracted inflows as investors trimmed technology exposure. That pattern reversed abruptly midweek as tech rebounded and defensives lagged, only to shift again by Friday as financials, industrials, and health care joined the rally.

Energy stocks experienced particularly sharp swings, driven less by fundamentals than by geopolitics. Optimism around a potential Russia-Ukraine peace deal pressured oil prices early in the week, pushing crude to its lowest levels since early 2021. That move reversed partially after President Trump ordered a blockade of sanctioned Venezuelan tankers, underscoring how sensitive energy markets remain to political headlines rather than supply-demand balance alone.

Consumer discretionary stocks provided pockets of strength, led by Tesla’s continued momentum tied to robotaxi testing and broader enthusiasm around automation. Travel-related stocks also performed well, highlighted by Carnival’s earnings, reflecting sustained demand for experiences even as consumer sentiment surveys weakened. At the same time, small-cap and mid-cap stocks struggled for much of the week, highlighting that liquidity and leadership remain concentrated in large-cap names.

Technically, the market made progress late in the week as both the S&P 500 and Nasdaq reclaimed key moving averages. However, the backdrop remains fragile, particularly with significant options expirations adding the potential for volatility. The fact that the equal-weighted S&P 500 lagged during rallies suggests that breadth remains inconsistent, even as headline indices recover.

Investment implication: Ongoing rotation and uneven breadth argue for diversified positioning, active risk management, and an emphasis on balance sheet quality rather than aggressive factor or size-based bets.

Chart of the Week

Michael Kantrowitz, CFA, Chief Investment Strategist at Piper Sandler, shared an update with clients on Friday examining the unemployment rate and recession risk through the lens of prior economic cycles. He noted that in the current cycle, the unemployment rate has risen at the slowest pace on record, increasing over a 31-month period from its trough, which contrasts with the more rapid labor market deterioration observed in past cycles. Piper Sandler’s view is that a combination of relatively low interest rates, subdued energy prices, and a gradual rise in unemployment could allow the Federal Reserve to remain accommodative into 2026. Within this framework, Kantrowitz suggests that conditions may become more supportive of cyclical sectors over time, particularly if Purchasing Managers Index readings begin to reaccelerate in 2026.

(Click on image to enlarge)

Source: Piper Sandler, Michael Kantrowitz, CFA

Bottom Line:

This week reinforced that markets are transitioning from narrative-driven rallies toward a more discriminating environment. AI remains transformative but increasingly scrutinized, economic data supports easing but not complacency, and leadership continues to shift beneath the surface.

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